Conversation for July 19, 2022

Recession Fears and Energy Investing

Fears of a recession are dominating the market today, raising questions about the potential impact on oil demand and inventory, and ultimately, price. To address these questions, Ninepoint’s own Eric Nuttall recently hosted a webinar with world-renowned oil analyst Amrita Sen to discuss today’s recessionary fears and the resulting impact on oil demand and prices.

Amrita makes a convincing case for a structural oil bull market. She sees sustained global demand for oil led by Asia’s industrial re-emergence and further supported by the continued effects of pent-up demand in a post-Covid world. On the supply side, tight oil inventories coupled with systemic under-investment in new production complete the picture for upward price pressure on oil.

Amrita predicts that these factors will keep oil prices over $100 from 2023 until 2027 when several large exploration projects finally come online.

To get the full story and view the webinar with Eric and Amrita, jump to Recession Fears and Energy Investing.

Five Myths of ETF Liquidity and Trading

We’ve received questions on ETFs recently that suggested there may be a few misconceptions around the importance of liquidity and trading practices in ETFs. Warren Steinwall, Ninepoint’s Chief Investment Operations Officer co-hosted a webinar with Camilo Gil, head of ETF Trading at CIBC World Markets, on the Five Myths of ETF Liquidity and Trading. Based on the impressive number of attendees, the topic was a timely one! Starting from the top:

Myth# 1 - AUM and trading volumes are a good proxy for ETF liquidity. Like mutual funds, volume traded is not a strong measure for ETFs.

Myth #2 - It Doesn’t Matter When You Trade an ETF. The short answer is – it does matter. Investors will typically be able to extract better liquidity and stronger pricing during the times when markets are open – but this is somewhat dependent on the type of ETF you hold.

Myth # 3 - The Bid-Offer Spreads Are Too Large. The concept of “bid-offer” does not really exist with ETFs. A market maker takes all the bids on the underlying basket of securities held within the ETF, and all the offers on the basket, and reconstitute it back up to a price that is posted on the exchange, trying to make it as tight to the NAV as possible

Myth #4 - ETFs Make the Underlying Market Inefficient. In periods of stress, when other assets may have no bid or no offer or have a very wide spread, ETFs may actually provide a safe haven. Through the turbulent market environment of the past couple of years, ETFs have performed well and have demonstrated the ability to add liquidity to markets and help with efficiency. They’re open-ended, so investors can trade and redeem, and they track nav incredibly well.

Myth #5 - ETFs Are Gobbling Up Assets Like Crazy and Now They Own the Whole Market. Yes, investors are finding ways to add ETFs into their portfolios effectively. It’s the type of asset that allows people to build very niche exposures when they want it, with the ability to get in and get out of an exposure quickly when needed. But as of the first quarter of 2022, ETFs held $352 billion in assets in Canada, compared to over $1.9 trillion held in mutual funds.

Dispelling the Myths - And finally - remember that ETFs are very transparent, with the holdings and the net asset value readily available. To assess overall liquidity, just look at the ETF’s underlying securities.

To hear Warren and Camilo’s full discussion on dispelling the myths, including the most common questions answered, listen to the full Five Myths of ETF Liquidity and Trading webinar here.

Canada Launches Its First Federal Carbon Offset Market

In mid-June 2022, Canada took another step toward a national carbon pricing strategy with the launch of its first federal carbon offset market, joining the EU, UK and regions of the US in creating carbon offset markets. British Columbia, Quebec and Alberta already have their own provincial compliance credit systems in place, however, this is the first at the federal level.

This new Canadian carbon market is expected to enhance transparency and provide a financial boost to those industries that the offset projects operate in, as well as giving compliant companies another tool to manage their carbon emissions.

Canada is jumping in at a time when the global carbon market is delivering robust performance, in contrast to heightened volatility in the broader markets. The EUA (European Union Allowances) posted a 7.3% monthly return in June, while UKA (UK Allowances) and RGGI (US Regional Greenhouse Gas Initiative) generated a 2.9% gain and a 1.3% gain respectively. The only down market is the California Carbon Allowance (CCA), which posted a 4.5% loss in line with the broader financial market. During the same period, the S&P 500 finished the month with a total loss of 8.3

Our view is that a more regulated carbon offset market is needed, and the creation of the new Canadian program further signals the long-term growth potential of carbon markets. As the rules become more established, A more transparent carbon market will allow us to put the right price on carbon, and a stronger carbon price will kick-start more growth in clean, renewable energy and incent businesses to discover more sustainable business models.

But how to set up the rules under the new federal offset program will be tricky. And it will all come down to how much flexibility is given to compliant companies to ensure their competitiveness while maintaining the integrity of carbon pricing scheme.

To read more on Canada’s entry into the global carbon markets, head to our recent Ninepoint Carbon Credit ETF Marketview Commentary.

Why do we need a secondary carbon market?

Compliant companies - like oil and gas players - policymakers, and investors participate in the carbon credit futures market for different reasons. They provide flexibility for compliant companies to decide how and when to manage carbon emissions, and transfer risks between counterparties. They promote innovation and incentivize businesses to discover more sustainable business models.

Why invest in carbon markets? For an emerging asset class like carbon credit, diversification and volatility management is critical. Currently, our Ninepoint Carbon Credit ETF invests equally in the four major ETS markets globally with quarterly rebalancing. This strategy has demonstrated resilience in the unprecedented recent carbon market volatility.

To read more on global carbon markets, jump to our Ninepoint Carbon Credit ETF May 2022 Commentary.